Buffer ETFs attract billions as investors seek downside protection amid stock market declines
Investors are turning to buffer exchange-traded funds (ETFs) to mitigate risks in a declining US stock market, according to The Globe and Mail.
These funds cap potential gains while providing a cushion against losses.
CFRA Research reports that buffer ETFs have attracted $2.5bn in inflows over the past month as the S&P 500 fell 6 percent.
Total inflows for 2024 have reached $4.7bn, with $140m added on Monday, the S&P 500’s worst drop this year.
Financial advisors are increasingly using buffer ETFs to keep clients invested in volatile markets.
Dinon Hughes, a partner at Nvest Financial, began shifting clients’ holdings into these funds last year, anticipating market turbulence.
The funds, offered by asset managers such as Innovator Capital Management, BlackRock, and Allianz Investment Management, use options to limit losses while capping potential gains.
Graham Day, chief investment officer at Innovator, noted that advisors are now reaching out for information, unlike last year when the firm had to introduce them to the concept.
An Innovator survey found that 82 percent of advisors are more concerned about stocks than any other asset class.
Market volatility, worsened by economic uncertainty and US trade policies, has driven interest in buffer ETFs.
Johan Gran, head ETF market strategist at Allianz, said volatility spikes have become more pronounced under the current administration.
Total assets in buffer ETFs reached $64bn in February, up from $38bn at the end of 2023, according to CFRA. Fuse Research Network projects inflows to nearly double this year.
Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, emphasized the importance of defensive portfolio strategies.
California-based advisor Stuart Chaussée has allocated about $320m of the $420m he manages into buffer ETFs, stating that upside caps must align with average market returns for him to consider them.
Nathan Garrison, chief investment officer at World Investment Advisors, warned that the cost of protection includes capped gains and higher fees.
Buffer ETFs often charge fees of 0.7 percent or more, compared to 0.05 percent for standard index ETFs or 0.35 percent for actively managed ETFs.
“You need to be aware of the volatility and risk of the markets these days, but you also want to be careful of what you’re rushing into,” Garrison said.
